Our innovation challenge is to bring relevant technologies to small farm holdings to enable them to prosper, says Rajesh Jejurikar, President – farm equipment sector, M&M. Talking to ET Now, Jejurikar says globalisation has been a priority and they are looking at going beyond tractors into farm machinery.
At 10,000-crore addition in market cap since the start of the year, is rural recovery for real?
Yes. Let me focus on the rural recovery rather than…
The market cap additions?
Which are outcomes, I guess. We have seen very clear rural recovery especially in the last two years. One has to see this contextually from the standpoint of two bad years of monsoon and draught which happened before that.
Positive monsoon and positive sentiment around monsoon are driving rural recovery. There is greater support coming in from the government standpoint but most importantly, it is the rural infrastructure drive — which is not agri ministry but rural development that is bringing in a lot of non-farm income.
Non-farm income is overall raising the prosperity of rural consumers which is leading them to keep part of that money in an asset class which they value and the tractor is certainly one such asset class. It is a combination of the fact that farming is being looked at positively and there is money flow from the non-farm spending side.
To put it very simply, if I look at the contribution of agriculture as percentage of GDP, that number is not very promising. Over the years, that number has only contracted. Aggregate farm activity is not expanding in line with the GDP estimates also. Is there a bit of a macro challenge here? The big picture is not encouraging?
Agri GDP is expected to grow and has been growing in the region of 3% to 4% right now. That is lesser than the average GDP growth but I do not think that is the right way to look at rural India.
There is a significant amount of income that gets generated in non-agri and rural households. Very often, we try to compartmentalise these as zero one. But think of yourself being in a rural household, living in a village, in a typically joint family and there are multiple sources of income into that family. Somebody in that family is running a may be a grocery store or may be a cement dealership; somebody else is working in a government role close by; somebody else is doing construction work. And then there is farming income. When you look at the services growth as a part of the GDP, a lot of that is playing out in rural India as well. Do not look at rural India as agri or nothing.
My only followup is we often say if we had a positive monsoon that would translate into tractor demand. How strong is that correlation on the ground?
It is not only monsoon, it is a combination of what is going to happen with monsoon and what is the overall income level in that place.
Suppose you say monsoons are not going to be good, farming outlook is not positive but there is money flowing into the rural economy. That consumer is less likely to invest in a tractor asset class at that point of time because they can afford to wait or postpone to a time when they see an upswing in farming. But when both are happening at the same time, that is you are seeing an upside in farming and you are seeing cash flows coming in either from farming income or non-farming income, you are more likely to say let me invest in an asset class which is useful to me today.
Analysts are valuing your farm equipment business twice as much as your auto vertical. Are they on the right track?
Frankly, I do not want to comment on that. This is our quiet period and so it is best to stay away from anything which is.
No, but are they in the right direction? I am not asking for any numbers?
They are in the right direction from the standpoint of saying that farm equipment is a great business to be in.
How do you think FY19 will be different from FY18? We are not talking about a specific comment on how things have moved for the quarter gone by but in terms of trends, in terms of inventory levels, in terms of new launches exports, how do you think this year will be different than last year?
That is a lot of questions in one go. Let me try and break it into two-three different themes. For the domestic industry, we are looking at a growth of 8% to 10%. We have spoken about that earlier and that is still our view. We may have a different view at the end of June like we normally would. We recalibrate once we see the final outcomes of monsoon but our view right now is 8% to 10% industry growth for the coming year.
Through last year, we have brought our dealer stock down by five days and we have spoken about that earlier too. We believe we are very well placed to leverage any upside because we have used the opportunity last year and really kept our dealers at a very good stock level.
Right now, one is trying to build the supply end. We should be able to increase and cope with any rise in demand. We have had two years of back-to-back close to 20% growth. We are in close to peak season. So, that is one of the areas that we stay focussed on.
Globalisation has been a priority for us. We are looking at globalising and we are looking at going beyond tractors into farm machinery and that is the reason we have invested in alliances in Mitsubishis agri machinery business in Japan, a harvester company in Finland which is Sampo and two companies in Turkey – a tractor company — Erkunt and another makig farm implements – Hisarlar. These have been the three very strategic plays that we have got into.
We believe the future is going to be about creating affordable technology and one of the things we announced last week is the intention to set up a technology centre in Virginia Tech in US. That will initially focus on our north American consumers and try and see what we can do by way of advance technologies to make a difference to that consumers. But we would also look at it globally.
We have also invested 10% in a company in Canada called Resson Aerospace and they are in the precision farming space, into advanced robotics, artificial intelligence where they are doing predictive crop outcome which help farmers either improve productivity or bring down costs.
That company also has two other strategic investors – McCain, the potato company and Monsanto Ventures. We go in as the third strategic partner.
So, we are looking at various initiatives which will lead and drive technology to improve farmer prosperity.
But given that you are the market leader, do you enjoy pricing power as well when it comes to tractors and farm equipment?
The only straight simple answer to that is our margins. You know we have been delivering very good margins.
That indeed is a case. Please break it down for us in terms of the product portfolio where the focus lies and how much contribution will come from where, given all your R&D investments?
Three years ago, we were a very strong tractor India-focussed company. Today we have multiple companies and many of them are into farm machinery. Mitsubishi has a larger share of farm machinery business than tractor business. Hisarlar is not tractor at all. So, a lot of our new growth initiatives are in the area of farm machinery. Roughly at this point of time, just to give you a rounded number, about 37%-38% of our revenue is global.
Is there scope for strong operating leverage to kick in FY19?
It is completely a forward statement.
The reason why it is not a forward statement is because demand is coming back and when you are saying that you are negotiating with your suppliers. So, demand is back and if your capacities are running in full flow. then there would be benefits?
Yes, the one thing you are not counting is what is happening to commodity prices. Through last year, we have seen a global trend of escalating commodity prices. You have to add that to the equation.
We talk about electric cars, we talk about driverless cars, we talk about innovation happening even in the tractor industry globally. Locally, the difference is that in India the farm patches are getting smaller and smaller, though globally that is not a phenomenon. Thats why technology comes to play so. Where do you see the big trend for Indian tractor industry?
Yes, so our innovation challenge is how do we bring relevant technologies to small farm holdings which can enable them to prosper. Really that is what drives us and that is where we think we will make a difference. So, we are not trying to play the game everyone else is playing. We believe that is where the Indian frugal mindset will come in and allow disruption to happen.
Are you confident, excited, or optimistic or cautiously optimistic in FY19?
I am smiling right now.